GLOBAL - Consulting firm Watson Wyatt has queried the use of tactical asset allocation, saying the evidence to support TAA is "mixed", especially when used to overlay a total fund.

The comments come as firms such as First Quadrant and Mercer have reported higher interest in TAA, defined as an active management portfolio strategy that rebalances assets to take advantage of market pricing anomalies or strong market sectors.

Watson said using TAA as a total fund overlay is "unwise and takes up a disproportionate share of the total risk budget".

The criticism builds on comments it made about TAA in a research report called "Remapping our investment world" in 2003. Then it said old-style TAA was "essentially a market-timing approach between equities, bonds and cash" with "narrow breadth and episodic performance".

But now Watson says TAA could have a place among active return-seeking skill-based strategies. It said: "To use their skill effectively, managers should be allowed to pursue their strategies without significant constraints."

A report by Mercer Investment Consulting last year of UK pension fund asset allocation found that TAA was expected to become more popular. It said the proportion of schemes using TAA was expected to rise from 3% to as much as 10% by 2005.

And TAA specialist First Quadrant says investors are starting to look again at TAA, or global macro as it is also known.

"In all, it must be said that good performance has led investors to turn their attention once again to tactical asset allocation," said chief investment officer Max Darnell in a recent note called "The Emergence of TAA as Global Macro".

"What they have found when they looked this time, however, is a substantially more interesting product that when interest peaked last time. TAA in the form of global macro brings to the table some of the most attractive attributes of any product out there."

The largest disclosed TAA mandate awarded recently was a £1.3bn brief awarded to Barclays Global Investors by Fujitsu Services last year.